Daily Commentary by Larry Baer 3.20.2012

Daily Commentary by Larry Baer: The swoon in the mortgage market has been largely created by investors’ reaction to last Tuesday’s post-meeting statement issued at the conclusion of the Federal Open Market Committee meeting.  The members of the committee said they expect “moderate” economic growth over coming quarters along with a gradual decline in the unemployment rate.  At its previous policy meeting in January, the Fed has said it expected “modest” growth.   While the Fed did acknowledge some improvement in the labor market, they left the door open to the possibility of launching another monetary stimulus program – to be known as “QE3” – and said they expect to hold their benchmark short-term interest rates near zero through late 2014.   

 Some of the upward pressure on rates is a function of investors adjusting portfolio positions as the prospects of additional mortgage-backed security purchases by the Fed as part of a “QE3” stimulus plan sometime later this year dims a bit.  Recent selling pressures in the mortgage market have also been driven in part by technical factors related to certain benchmark Treasury yields breaking above their 200 day moving average – an event which triggered a recasting of hedge positions by many credit market participants – temporarily generating an exaggerated flurry of trading activity.

While the recent trading action in the mortgage market is undeniably uncomfortable for those still floating loans -- the probability mortgage rates are destined to surge notably higher from here remains small.  Additional upward pressure on mortgage interest rates is almost sure to bring the Federal Reserve racing to the rescue with another round of mortgage-backed security purchases to hold rates near current levels.  The recovery in the housing sector is far too important a cog in the gears of the budding economic recovery for the Fed to allow sharply higher borrowing costs to derailed it now.

Be patient – be disciplined – and play it by the numbers.

THE MARKET IS ALWAYS RIGHT! … YOU AND I ARE SOME OF THE TIME